Corporate-friendly Delaware is home to many limited liability companies (LLCs) formed under Delaware law, and a recent decision of the Delaware Chancery Court provides instruction for Delaware LLCs and guidance as to other states, concerning the duties of LLC managers. In a feud between owners, the court held that “the manager of an LLC owes the traditional fiduciary duties of loyalty and care to the members [owners/partners] of the LLC”, unless such duties are eliminated or restricted by the specific terms of the LLC’s operating agreement.
In a single-owner LLC, there may be little occasion for dispute, but in an LLC with more than one owner (such as a partnership or joint-venture type project), the person or entity appointed as LLC manager may have liability exposure to the extent it favors one member’s interest over another. Such member favoritism may be alleged even in the absence of unequal payments or concrete breaches of the operating agreement, for example in this case, where the LLC manager allegedly effected loan modifications with the LLC lender which may have weakened the entity but reduced one member’s potential exposure under loan guarantees. The court notes that the Delaware LLC law permits an LLC operating agreement to modify or completely eliminate a manger’s fiduciary duties. Thus the relevant terms of an LLC operating agreement as to the manager’s fiduciary duties, exculpation and indemnity should be considered both when setting up an LLC, and even more so when the single owner of an existing LLC contemplates bringing in one or more new partners (or an investor contemplates buying into an existing LLC). (Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC, Delaware Chancery No. 3658-VCS, April 20, 2009)